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THE BASICS (1) Flashcards

1
Q

economics

A

the social science studying how to satisfies people’s unlimited wants with scarce resources - examines the production, distribution and consumption of goods and services and how to maximise welfare.

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2
Q

normative vs positive approach

A

normative = how should be done
positive approach - how things are done

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3
Q

finance

A

subset of economics, how to allocate resources over time and under uncertainty

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4
Q

risk

A

by definition, the future is uncertain

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5
Q

mean-variance model - modern portfolio theory

A

risk juxtaposed to return

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6
Q

CAPM

A

capital asset pricing model, what is a theoretically appropriate required return to an asset when added to a well-diversified portfolio.

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7
Q

asset pricing

A

valuing assets (value of securities)

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8
Q

corporate finance

A

how firms get funding and how they invest it

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9
Q

household finance

A

saving/investment decisions made by households

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10
Q

macrofinance

A

link between asset prices and economic fluctuations

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11
Q

market microstructure

A

price formation in asset markets

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12
Q

mathematical finance

A

novel methods and models to analyse financial problems

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13
Q

climate finance

A

incentives to mitigate/adapt to climate change and carbon pricing

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14
Q

behavioural finance

A

how psychological influences and biases affect financial decisions

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15
Q

Assumptions in finance

A

selfish agents, high returns better, low risk better, money now better than money later, security prices make supply = demand, financial innovation focuses on risk sharing and friction reduction, too many variables - models will be unrealistic

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16
Q

real asset

A

produce goods and services, generate net income to the economy and determine material wealth

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17
Q

financial assets

A

claims on real assets and hence on the income provided by the latter, each financial asset = financial liability, sums to 0. defines individual income/wealth amongst investors

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18
Q

net national wealth

A

sum of total real assets only

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19
Q

non financial firms

A

typically net borrowers, issue securities to investors and use funds to invest in risky projects, the funds can come from profit, banks, private equity, venture capital, private capital, stock market (public company), bond market(large firms)

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20
Q

households

A

net savers, purchase securities from government and non-financial firms and or depoist in financial firms /banks

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21
Q

government

A

NET borrower, through issuing bonds when taxes fall short - budget deficit sometimes saves = budget surplus

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22
Q

financial intermediaries

A

issue own securities to invest in financial assets, act as clearing houses for financial assets and liabilities bringing brorowres and savers together

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23
Q

overseas sector

A

borrow from overseas when domestic savings < domestic investment = capital account surplus

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24
Q

high liquidity

A

need to be easy to get back, small amounts low risk

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25
low liquidity
e.g. infrastructure projects, years to get back, high risk
26
functions of financial intermediaries
size transformation - aggregation of small lenders and borrowers, maturity transformation - pool short term deposits to lend longer term - credit crunch risk (when everyone wants money back at same time and cannot liquidate fast enough) , risk transformation - smooth risk of lending to risky ventuires by pooling, diversifying,monitoring and hedging
27
financial markets in the economy
information role -setting security prices, allocate capital between uses, sep ownership and control, governance and ethics timing of consumption - financial assets allow shift consumption to real good when earn more to earn less risk allocation - allow risk to be traded across economy
28
what do financial markets achieve
efficient resource allocation (not necessarily optimal)
29
key features of financial markets - primary vs secondary
initial floating of security vs trade of already existing securities on a primary market
30
key features of financial markets - regulated vs alternative exchanges
e.g. stock changes vs more loosely regulated over the counter trading
31
order driven trading
all trades visible to everyone centralised and direct
32
quote - driven trading
decentralised intermediate, dealership can see what is being offered - less transparent but high reward
33
bid
price as which market maker is willing to buy
34
ask
price at which market make is willing to sell bid < ask
35
liquidity
ability to trade a security fast at price close to fundamental value
36
depth
maximum order size that can be executed without affecting security price `
37
brokers
find buyer/seller counterparty earn comission
38
dealers
counterparties for buyers and sellers, earn bid/ask spread
39
exchanges
automated - no need for brokers + dealers
40
equity market
flow of funds
41
bonds
intruments constituting a loan made by buyer (lender) to issuer (borrower) fixed - income
42
bonds - loan today
purchase price (usually below face value)
43
bonds - coupons
interest payments
44
bonds - principle/face value
payment due back at maturity
45
government bonds
semi-annual coupons (collected every 6 months) normally considered riskfree interest rate contingent on maturity treasuries, gilts (coupons adjusted for inflation)
46
corporate bonds
different repayment priorities higher yield than government bonds variation in risk
47
yield
interest rate that makes current price fair
48
stocks
ownership of a share in a business, entitles shareholders to dividendsva
49
value of of stocks
present value of future dividends and liquidation value or expected present value of future cashflows frmo business projects after paying off creditors
50
debt
not an ownership interest, creditors do not have voting rights interest is considered the cost of doing business and tax is deductible creditors have legal recourse if interest or principle payments are missed, FUTURE CASHFLOW IS OFTEN KNOWN
51
excess debt
financial distress, bankrupty, agency debt issues
52
equity
ownership interest, common stockholders vote for board of directors and other issues, dividends are not considered cost of doing business and are not tax deductible, dividends are not a liability to the firm and stockholders have no legal recourse if dividends are not paid all equity firm cannot go bankrupt and FUTURE CASHFLOW IS STOCHASTIC
53
EQUITY INDICES
Dow Jones - price weight Standard and Poors - value weighted FTSE 100 - value weighted
54
futures
contractual agreement to exchange a security for a specified cashflow on a future date
55
swaps
a contractual agreement to exchnage two sets of cashflows over a specified time period
56
forwards
Non standardised contracts to exchange a security for a specified amount on a future date
57
convertibles
debt instruments that convert into company equity under certain condition
58
options
instruments that give one party the right to buy or sell the underlying security
59
asset-backed securities
instruments collateralised by an underlying pool of assets such as mortgages, receivables, life insurance policies and loans
60
cash funded transactions
through bank account/cheque
61
margin funded (bull)
more funds -> risk of losses and value fluctuations could lead to forced sales - have to provide at least 50% - buying from a broker and maintenance margin at least 30%. margin =( value of security - loan) / value of security = equity/value of security security prices expected to rise by investor
62
short selling (bear)
With short selling, a seller opens a short position by borrowing shares, usually from a broker-dealer, hoping to buy them back for a profit if the price declines. To close a short position, a trader repurchases the shares—hopefully at a price less than they borrowed the asset—and returns them to the lender or broker inverstor expects security prives to fall
63
equity
ownership interest in a company

BPES (8 decks)

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